Are Secured Debt Consolidation Loans A Good Idea?

Secured debt consolidation loans are a good option when your debt has grown out of control. In tough economic times many of us find ourselves unable to meet our payment obligations. In addition to the stress caused by these situations, large amounts of debt can affect your credit score.

But is this type of debt consolidation a good idea? The answer is "It depends." While in some situations it's an excellent way to get control of your debt, it's not the right solution for everyone.

How Secured Credit Loans Work

First, it's important that you understand how secured consolidation loans work. The word "secured" in secured debt consolidation loan means that the lender secures the money lent to a borrower by acquiring a lien on a specific piece of property owned by the borrower. Secured debt consolidation loans generally use equity in a home. If you don't have equity in your home, this type of debt consolidation loan won't be available to you.

Secured debt consolidation loans allow you to borrow money against your home in order to pay off outstanding debt. As a result, you only have to make one monthly payment, and your interest rate may be significantly lower than the interest rates for your unconsolidated debts. A secured debit consolidation loan can also beneficial to your credit score as all your individual debts will be paid off by the loan.

Benefits of Secured Debt Consolidation Loans

  • With secured debt consolidation loans you can borrow large amounts of money based on your equity.
  • You can combine multiple debts into a single payment.
  • Your obligation can be transferred to one lender.
  • Repayment terms of 15 to 20 years are common. This means your monthly payments will normally be very small.
  • You will experience less mental stress with one easy payment than with multiple payments.

Why Secured Debt Consolidation Loans Can Be a Bad Idea

  • You can tie up your home equity. This means that if you sell your home, you will have to pay for the debt consolidation loan with the equity that would normally be available to put into your next home.
  • Secured debt consolidation loans can offer a low monthly interest rate but because the interest is paid over such a long period of time, the total amount of interest you pay during the life of the loan can be exorbitant.
  • If there is no change in the way you use credit, you could find yourself in the same mess a few years down the road with no way out. A secured debt consolidation loan is not a long-term solution to your debt problems if you use credit irresponsibly.
  • If you are unable to make your payment for whatever reason, you will lose your home.
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